Covid-19 and UK regional labour markets: a snapshot

The economic outlook is highly dependent on trends in discretionary spending, which in turn depends partly on localised labour market prospects.

In my last blog post focusing on the UK regions and nations, I noted that further analysis of household finances was in order if we are to gain a better understanding of the potential localised impact of Covid-19. Now that we have spent more time in 2020 with conditions of lockdown and/or social distancing than without—and with no return to pre-pandemic ‘normality’ in sight—how are the prospects for the regions evolving?

Before speculating on the future, it’s worth looking at the current conditions in more detail. For all the discussion about regional inequality in the UK, official data show less regional variation in many metrics than one might expect. For example:

  • Households’ financial debt as a percentage of their household income (excluding mortgage debt) is uniform across the UK, in a tight range of 15-17%--though the exclusion of mortgage debt is a major caveat and its inclusion would likely change this picture significantly.
  • The incidence of household indebtedness is also uniform, with the percentage of households holding some debt ranging from 49% to 53% across all regions.
  • Income differs widely, ranging from £28,000 per head in London to £16,000 per head in Wales. But spending patterns are remarkably consistent. The split between the percentages of household spending on necessities vs discretionary spending is 54%/46% across the UK.

This last distinction is important, because with consumer spending accounting for two-thirds of the UK economy, it is not too much of an exaggeration to assert that trends in discretionary spending will determine the economic outlook in the months ahead. And these trends may well have significant regional variation.

Provisional research from the Centre for Economic Policy Research[1] analysed 8.5m transactions on MoneyDashboard, an app-based personal financial manager, from January-April 2020. Among the interesting findings in this research is the fact that consumption inequality across the UK increased “significantly” in March-April, and more markedly than income inequality. It is important to note that since the transaction data reflect the income and spending of a self-selected, tech-savvy and younger-than-average population, the sample is not representative and the findings should not necessarily be extrapolated across the UK economy as a whole.

While existing conditions will have determined consumption patterns in the first few months of the pandemic, in the medium-term, consumer spending—and therefore economic output—will be determined by employment trends (both perceived and actual). Here again there may be significant regional variation.

For example, the table below shows the pre-pandemic and current unemployment rates by region and nation (three-month rolling average). Perhaps the most striking observation is that in a number of regions and nations, the unemployment rate actually declined between January and May. Of course, without further analysis of local conditions, it is difficult to draw many conclusions from this observation. And the biggest unknown is the extent to which the government’s furlough scheme has simply delayed a rise in unemployment.

 

Unemployment rate, %, Mar-May 2020

Unemployment rate, %, Feb-Apr 2020

Unemployment rate, %, Jan-Mar 2020

London

5.1

4.6

4.7

North East

5.0

5.2

5.4

West Midlands

4.9

4.8

5.0

Scotland

4.3

4.6

4.1

East Midlands

4.0

3.7

3.8

North West

3.8

4.1

4.0

Yorkshire and The Humber

3.8

3.9

4.3

East of England

3.6

3.6

3.7

South West

3.4

3.0

3.1

South East

3.0

3.0

2.9

Wales

2.7

3.0

3.2

Northern Ireland

2.4

2.3

2.4

 Source: Office for National Statistics

In my previous blog post examining the impact of Covid-19 on the UK regions, I noted that there are some regional variations in employment structures that are worth considering as we examine the impact of Covid-19. For example, the wholesale, retail and vehicle repair sector (one of the worst hit by the pandemic) accounts for 12% of employment in London but 17% in the East Midlands and North West. Accommodation and food service represents nearly 10% of employment in the South West but a more modest 5.8% in the West Midlands.

We undertook analysis comparing the change in regional unemployment rates and the percentage of regional employment represented by sectors strongly impacted by the pandemic and found no correlation—yet—between regional employment structures and unemployment. However, this is not especially surprising given the extent to which the government’s furlough scheme has cushioned the labour market; we have no way of knowing for sure what the regional unemployment picture during this period would have looked like if businesses were forced to make people redundant rather than furloughing them (although with some assumptions, we could make some reasonable estimates).

To date, the official data on the Coronavirus Job Retention Scheme (CJRS) allows little extrapolation of likely regional differences in future unemployment. HRMC data show that the scheme’s take-up rate (jobs furloughed as a percentage of eligible jobs) is a uniform one-third across the whole of the UK; the percentage ranges from 29% to 32% (East of England, South East and Wales) to 32% (West Midlands). If this uniformity were eventually to translate into relatively uniform increases in unemployment across the regions once CJRS is phased out, a plausible explanation could be that the differences in employment structure are not significant enough to have a noticeable impact on macro indicators. Another possible explanation—potentially complementary to the first—is that relatively flexible local labour markets and the highly unusual nature of the current economic downturn enable a restructuring of employment that leaves headline figures minimally changed (for example, if employment increases in areas like IT and logistics were to partly offset employment losses in areas like retail and hospitality.

Many other factors will affect the Covid-19-based outlook for regional unemployment, notably differing regional demographics (younger workers are disproportionately affected); the presence of the government in the local economy; regional exposure to trade and global value chains; risk-based capital reallocation; business access to credit; and regional resilience, including human capital and digital infrastructure—making the observations above a snapshot rather than a comprehensive analysis. And of course, the household sector is only one (very important) aspect of economic analysis. In a future post, I will turn to the business sector, including a look at the impact of the pandemic on UK financial services.

[1] ‘Consumption in the time of Covid-19: evidence from UK transaction data’, DP14733, 8 May 2020.